Russian Economy Suddenly Shrinks in November

Russia’s economy unexpectedly contracted in November, hit by a drop in industrial production, the economy ministry said on Monday.

Gross domestic product shrank 0.3 percent year on year in November, the economy ministry said, contrasting with analysts’ consensus call for a 1.5 percent growth.

Russia’s oil-dependent economy was on the mend in 2017 after two years of recession, triggered by a sharp drop in global commodity prices as well as sanctions imposed by Western countries against Moscow for its role in the Ukrainian crisis.

In November, GDP was dragged down by the industrial sector where output contracted 3.6 percent compared with a year ago. The economy ministry said it blamed the weaker industrial output on the global agreement of major oil producers, including Russia, to limit crude production in order to prop up commodity prices. The ministry also said the industrial output sank because of the warm weather, which pressured demand for natural gas on either domestic and foreign markets. (more…)

Russian Economy Minister: Russia’s Budget Deficit not to Exceed 2% of GDP in 2017

Russia’s budget deficit will amount to around 2% of GDP or even less by the end of this year, Economic Development Minister Maksim Oreshkin said Wednesday.

“Despite oil prices falling to around $40 per barrel, budget deficit will be less than 2% (of GDP) this year,” he said.

According to Oreshkin, the country’s economy is on the rise. “What is being discussed now is the issue of economic growth. Global organizations and we expect (GDP) growth of roughly 2%,” he said.

The Russian government and the Central Bank are already implementing a number of measures aimed at reaching higher growth rates, the minister said. “Two years ago inflation was above 12% whereas today’s inflation is within the range of 2.6%,” he said.

Russia’s Economy Is Growing With Borrowed Money

Without any new ideas from a technocratic government constrained by President Vladimir Putin’s apparent indifference, the Russian economy is once again relying on consumers, who are borrowing more to buy real estate and imported products. The growth is real, but it’s also meager. And it will be hard to sustain without bigger changes.

On Monday, Rosstat, Russia’s official statistics agency, announced that the country’s gross domestic product increased 1.8 percent year-over-year in the quarter than ended in September. That’s lower than Bloomberg’s consensus forecast of 1.9 percent and slower than the 2.5 percent increase in the previous three months. The oil price jumped 20 percent during the quarter, but the economic statistics won’t pick up the related growth until the fourth quarter. So far this year, the Russian consumer deserves most of the credit for the growing economy. After suffering through three tough years — during which time oil tanked and the ruble devalued sharply — they are buying things again. Unfortunately, most of the things Russians are buying aren’t made in Russia.

The stability of the ruble (it has gained about 1 percent against the U.S. dollar so far this year) and low inflation (the Bloomberg consensus forecast is for it to fall by almost half to 3.8 percent this year) have helped boost consumers even though real disposable incomes dropped throughout the quarter. Households are choosing to get more leveraged.

In 2015 and 2016, household debt went down as interest rates and bad loans shot up. By the end of 2016, some 20 percent of consumer loans were non-performing, according to the Central Bank. Banks that had issued them rolled up their programs and viewed borrowers with increased suspicion. This year, however, the Central Bank has lowered its key rate from 10 percent to 8.25 percent, and banks couldn’t resist the temptation to offer more funds to private borrowers. With mortgage rates at a historic minimum and consumer loans affordable again, Russians have some convincing reasons to warm to the idea of borrowing.

The Central Bank claims it isn’t worried because consumer borrowing has only been increasing by about 2.5 percent of the monthly retail trade turnover — not enough, by its analysts’ reckoning, to drive up inflation. Russian banks have a total mortgage portfolio of some 5.5 percent of GDP, compared to 20 percent in Poland. There are, however, signs that the Central Bank sees a bubble in the making, at least on the mortgage market. Starting this month, it has required drastically higher reserves against mortgages with a down payment below 20 percent.

Apart from the lack of income growth, which makes any debt increase risky, the Central Bank is facing another problem. In recent months, it’s had to take on two large banks — Otkritie and B&N — with a combined balance sheet hole of at least $12 billion. Private Russian banks find it difficult to compete with state behemoths Sberbank and VTB without taking on too much risk. More failures would stretch the central bank’s resources.

The state banks, hit with Western sanctions and thus deprived of the cheap Western loans that fueled the previous loan boom in the 2000s, have problems of their own: They are short of liquidity. VTB would have run into trouble in the third quarter without massive government deposits.

Russia needs better growth sources than household borrowing. The government has counted on private investment growth, which was unexpectedly robust in the second quarter. But for more investment to materialize, Russia needs to develop more export competences, the way it has done with agricultural commodities such as wheat. High oil prices have historically discouraged that sort of diversification, and crude, at more than $63 per barrel, is much more expensive than the $40 the Russian government budgeted for this year. It’s even high enough for the country to start pouring money back into its reserve funds.

Russian President Vladimir Putin has always been extraordinarily lucky. The Russian economy has returned to growth and consumers have been reassured by low inflation and a stable currency just as he prepares to run for a fourth term in office next year. But sustaining even this small level of growth for another six years without structural change will be a challenge. Putin has shown little interest in explaining how he’s going to tackle it, focusing more on the complex geopolitical game he’s been playing. Whether that game is tactical or strategic, the Russian economy is in dire need of a coherent strategy as it continues coasting along on a mixture of hope, luck, oil and grain.

Reuters: Russian Economic Growth Upgraded, Inflation Seen Slowing

Russia’s economy is seen growing slightly faster this year than previously and inflation is seen slowing, a Reuters monthly poll of economists showed on Thursday.

The median forecast of 20 analysts and economists polled by Reuters in late August was for Russian 2017 gross domestic product (GDP) growth of 1.7 percent, above last month’s call of 1.4 percent.

Even though Russia’s economic outlook has improved, the poll’s median forecast is still below the economy ministry’s forecast of 2.1 percent this year.

Russia’s economic prospects could improve further, however, if the central bank cuts lending rates as analysts expect.

Respondents said the conditions were now right for the central bank to trim the key rate, now at 9 percent, at its next board meeting on Sept. 15.

A resilient rouble and steady oil prices have given the central bank room for a rate cut, analysts at Bank St Petersburg said in comments with their forecasts.

The central bank is now widely expected to trim the key rate to 8.75 percent next month, taking it to 8.25 percent by the end of the year, the poll showed.

“There are the conditions for a further rate reduction, and a step of 25 basis points is optimal,” said VTB economist Alexander Isakov. “It insures the central bank against overshooting the trajectory which leads to 4 percent inflation.”

The Reuters poll showed 2017 consumer inflation at 4.1 percent, compared with last month’s forecast of 4.2 percent.

This marks a slowdown of nearly 17 percent from early 2015.

Now, when headline inflation has already hit a post-Soviet low of below 4 percent, the central bank may embark on monetary easing cycle after keeping rates on hold since in July, the economy ministry predicted.

Russian Economy Minister Maxim Oreshkin said earlier on Thursday he expected consumer inflation to reach 3.5-3.7 percent by the end of the year.

“We think this would be among the factors that open the door for monetary policy easing by the central bank,” he said.

The poll also showed that the rouble is seen trading at 61.60 versus the dollar in a year from now RUB, slightly weaker than the 61.00 forecast last month.

Russian Economy Moves to Recovery from Recession

The Russian Federation is showing encouraging signs of overcoming the recession it entered in 2014. The economy is projected to grow 1.3% in 2017, and then 1.4% in both 2018 and 2019, according to the World Bank’s latest Russia Economic Report (no. 37 in the series) launched on May 23 in Moscow.

Growing macro-stability, driven by the government’s policy response package of a flexible exchange rate policy, expenditure cuts, and bank recapitalization – along with tapping into the Reserve Fund – has helped facilitate the adjustment of an economy hit by the double shocks of low oil prices and restricted access to international financial markets. The positive terms-of-trade effect from rising oil prices, coupled with more stable macroeconomic conditions, are expected to drive Russia’s economic recovery going forward.

“Macro stability and oil prices are the main factors driving this recovery,” said Apurva Sanghi, World Bank Lead Economist for the Russian Federation and the main author of the report. “Successful adherence to the 2017 – 2019 Budget Law will be key for laying the proper groundwork for the planned fiscal rule, which will subsequently reduce the sensitivity of the budget to oil prices and improve economic predictability”.

Consumption is expected to drive growth in 2017-2019, with investment playing a supporting role, says the report. Headline inflation is expected to continue moderating, falling slightly below 4% at the end of 2017 and stabilizing at around 4% in 2018-2019. Lower inflation will support real wages, which will be the main source of real income growth. Along with these developments, improving consumer sentiments and better credit conditions are all expected to lead to a growth in private consumption of 1.8% in 2017 and 2.5% in both 2018 and 2019.

Investment demand is expected to increase in 2017-2019, due to a pick-up in fixed capital investment growth and a restocking of inventories, predominantly in 2017. Additionally, the 2018 FIFA World Cup – which will take place in Russia – could further support public investment.

The report emphasizes that the poverty rate is expected to decrease because of decelerated inflation and recoveries in household incomes and consumption: the poverty headcount is projected to decline from 13.5% in 2016 to 13% in 2017, and to continue declining to 12.3% and 11.6% in 2018 and 2019, respectively.

The special topic of the report examines how Russia’s regions fared during the crisis years of 2014-16. While they fared well as a whole, significant disparities and variations remain in the fiscal health of the regions. Moreover, the adverse effects of the crisis were averted by a strategy of significant expenditure cuts in the regions, which may have deleterious medium-term effects on regional productivity.

In that context, Russia’s regions have room to improve their fiscal buffers, by tapping more into the revenue side, raising select taxes and increasing yields of other taxes, for example. In the long run, a rebalancing of the division of revenues and functional responsibilities between the federal government and the regions may need to be considered.

Russia’s longer-term growth prospects, however, remain constrained by its low productivity.

“Boosting productivity growth remains key to achieving inclusive, sustainable and fast-paced growth in Russia,” said Andras Horvai, World Bank Country Director and Resident Representative in the Russian Federation. “While we already see the benefits of increasing macro-stability – not only through a return to growth, but also in declining poverty – addressing deeper structural issues related to demography and competitiveness would enable Russia to take full advantage of the positive momentum.”

Russian Crisis Weeds out Bad Importers

The spending power of middle-class shoppers in Russia has been reduced in the last couple of years, so Andrey Volkov from Tropic group said that importers have to play it safe with what they purchase and are more hesitant to introduce new exotics. People are only really buying the basic fruit and vegetables, ie. bananas, citrus, potatoes, cabbage.

Tropic group is one of the top 5 importers in Russia, and their largest importer of Moroccan tomatoes.

Andrey reports that there have been a lot of problems in the last several years with bad companies who take large volumes of fruit and veg and then ‘disappear’ into thin air without paying a cent, leading to a large volume of unpaid debts.

“The supermarkets are more protected from these problems because they have properties and are able to absorb the losses. We have to be vigilant and very aware of who we are dealing with, especially in the last 5 years.” continued Andrey.

But it’s not all doom and gloom; “My prediction is that the market will be cleaned up in the coming years, survival of the fittest, and reach the same kind of level as the rest of Europe, with a few major importers, with a lot of the medium importers disappearing.” said Andrey. “That is something positive we can take out of the crisis, I am expecting that the wrong people should disappear. It’s just like the wild, wild west – only the strongest will survive.”

Ruble Keeps Strengthening in December

November 31, the Organization of the Petroleum Exporting Countries (OPEC) agreed to cut their oil production by 1.2 million barrels per day in order to raise global prices. Global oil prices increased by 15% after the decision had been made, with Brent crude rising from $46 per barrel up to $53.77 per barrel next day, and they kept growing in December – 56.94 (Dec 29). Now the analysts predict the oil prices to be at the level of $60 in 2017. Just to remember – in January, 2016, Brent crude price was $32.1 per barrel. As ruble has been strongly correlated with oil prices, it strengthened in December and gained 7% against USD and 8,5% against euro. In 2016, it gained against USD more than 27% – from 83.6 rubles per dollar January 22, 2016 to the official rate of the Russian Central Bank on December 29, 2016 60.67 rubles per dollar.

According to the Russian Ministry of Economic Development, in 2016 the consumer price inflation is estimated to be 5.6%, which is slightly lower than it was officially forecast. In annual terms, the inflation rate is declining steadily since July of this year – from 7.5% in June to 5.8% in November. Russia’s GDP fell by 0.6% during 11 months of 2016. Just to compare: in 2015, GDP fell by 3.7%, and inflation was 12.9%.

According to the Ministry of Economic Development, the real disposable household income, i.e. the amount that remains in the hands of the citizens after the payment of all required payments, will decrease more than expected. It was forecast to be 5.6% decrease, now it is estimated to be 5.8% fall.,,

41% of Russians spend less money on food

Over the past six months, more than 40% of Russians began to spend less on food, according to a new research made in October by the fund “Public opinion” (FOM).

41% of Russians said that they had begun to save on food more than before, and 46% of Russians reported that they had not changed their spending habits.

It was found that most Russians save on meat and poultry (24%), cheese and sausages (20%), fish and seafood (18%), and fruit (14%).

As for non-food items, 25% o Russian save on clothes and shoes, 15% – on entertainment and leisure, 13% – on perfumes and cosmetics, 12% – both on restaurants and electronics.

Economic crisis forces Russians to change eating habits

Russian consumers are being forced to change their diets by the economic crisis, which has seen them opting for cheaper lower-quality food, a report by Analytical Credit Rating Agency (ACRA) revealed Monday 6 June. According to the report, Russians are replacing vegetables, fruit and fish for bread, potatoes and dairy products.

Although the amount of calories consumed by the average Russian has remained the same.

“In the future, consumer preference will possibly continue to shift further towards cereals, flour, butter, seasonal vegetables and sugar,” the authors of the report wrote.

Real wages suffered a record drop of 9.5 percent in Russia last year, while the overall consumption of food products also dropped by 4.2 percent.

How Russians deal with the recession

May 10, the forecast for 2016-2019, made by the Ministry of Economy, was published. The Office proposes to limit the salaries of state employees in 2016-2017. Sergei Naryshkin, State Duma Speaker, said that deputies may not support the limitation of salaries. Dmitry Peskov, spokesman of the Russian president, said that the Kremlin has no clear position on the proposals of the Ministry of Economy. How has the recession already affected the lives of Russians?

According to the research by the Institute of Social Analysis and Forecasting, for the first time in eight years Russians spent more than half of income, 50.1%, on food products.

In 2015, the real wages of Russians decreased by 9.5%, forcing them to revise their spending, as well as the budget for the vacation.

Russians also began cutting spending money on entertainment and eating out. For example, according to Nielsen study of September 2015, 49% of respondents admitted that they had not been in bars since the beginning of the year. The number of people who ear out at least once a month, has decreased by 10% on average.

According to the latest opinion poll, published on May 10, 1% of the respondents said that the situation in the country was great, 11% said it was good.

Business in crisis

British consulting company Global Counsel  published a report in late 2015 which stated that in 2016 Russia would leave many global companies. The conclusion was based on analysis of financial statements of 46 companies, including BP, Royal Dutch Shell, Deutsche Bank, Siemens, Lafarge.

The recession was the hardest for retail companies, especially in the middle segment. In 2015, many brands had to leave the Russian market, including American Eagle, River Island, Esprit, New Look, Finnish department store Stockmann, that was on the market since 1989. In 2014, the company’s losses amounted to €26 million.

Sales grew mainly in the low price segment. This is clearly seen in the fast food market: in 2015, leaders were KFC, Burger King and McDonald `s.

According to the Association of European Businesses (AEB), in 2015, sales of cars in Russia fell by 35.7% to 1.601 million vehicles. Some car brands had to leave the country, such as Opel, Honda, Seat. Chevrolet stopped selling most car models.